Question mark over second-half turnaround

Macquarie Group beat expectations for its interim profit result and the market is starting to warm to its full-year earnings forecast after initially giving it little credit.

The investment bank maintained its guidance that full-year profit would be in line with last year’s number. But even after beating its own guidance for the first half, investors still question whether it can mount a big enough turnaround in the second half to get to an implied $1.05 billion result.

A big disappointment was the deflated return on equity, which slumped to an annualised rate of 7.1 per cent from 10.3 per cent in the previous half.

Remember, this is the bank that built its reputation on the successive delivery of ROE above 20 per cent before the financial crisis.

It remains the case that better returns can be derived from investing in the commercial banks. Indeed, Macquarie’s ROE is less than half what mortgage giant Commonwealth Bank of Australia is churning out.

Also surprising was the expense growth: operating expenses were $3.2 billion, up 23 per cent compared with the first half of 2009-10. The biggest factor here is the staff numbers Macquarie picked up on its acquisition spree. Management insists average pay remains flat.

They also give the impression Macquarie has real conviction about a markets revival in the medium term. While this recovery is testing the patience of management and investors, Macquarie still believes that when the swing happens it is best placed to shift into high gear because of its expansion and diversification.